NU Online News Service, Aug. 12, 3:16 p.m.EDT

Even as Bermuda executives chatted up the Jan. 1, 2012reinsurance pricing upside of catastrophe events and model changesrecently, midyear 2011 renewal strategies varied widely along withopinions about where to bet reinsurance capital.

According to the cover feature of NationalUnderwriter's Aug. 8 print magazine, executives like ChrisO'Kane, CEO of Aspen Insurance Holdings, predict a $20-$60 billion surge in catastrophe reinsurancedemand at Jan. 1, fueled by changes in RMS's catastrophe model—evenif reinsurers experience no major U.S. hurricane losses thisyear.

Still, nearly all of the executives of publicly trading Bermudareinsurers that discussed first-half results during earningsconference calls last month described moves to protect theirbalance sheets by purchasing more retrocessional cover. Beyondsimply retaining less cat business—allowing room to grow when theharder Jan. 1 opportunities surface—several say they had nonrenewedchunks of business in certain geographies, offering divergent viewson current ranges of pricing opportunities.

Lancashire Insurance CEO Richard Brindle, for example, says hiscompany nonrenewed its entire book of Florida-domiciled cedents,reporting that Lancashire saw no signs of double-digit rateincreases being touted by others. “None of the submissions we wereshown when properly adjusted for RMS 11 were anywhere near that.Indeed, in many cases they were substantial reductions,” Brindlesays during a recent earnings conference.

Executives at Everest Re and RenaissanceRe reported Floridarenewal prices in the 10-15 percent range, while Validus CEO EdNoonan says his company scored hikes around 25 percent on shortfallcovers for Florida placements.

Noonan explains to PC360 that with reinsurers, cedents andbrokers in varying stages of understanding the impact of modelchanges during midyear renewals, “you ended up with brokers andreinsurers having a very wide spread as to what they thought theright price should be. In that circumstance, the broker's job is todo the best for their clients, so they come into the market with aprice that in many cases was too low to complete theplacement.”

“The brokers sometimes like to play chicken with the market, andthey wait as long as they can, thinking that the reinsurers willcave and agree to [lower] prices,” he says. However, in the lastdays of May for the June 1 renewals, the brokers suddenly realizedthat wasn't happening, and they were left with incompleteplacements for clients that still needed capacity.

“At that point, the price of capacity for Florida had gone upjust because of supply and demand,” Noonan says, explaining howValidus was able to get as much as 25 percent higher on theshortfall cover than the original placement.

Across Validus' entire U.S. property cat reinsurance book,Noonan says, risk-adjusted pricing was up nearly 12 percent.

Meanwhile, Platinum Underwriters' CEO Michael Price views theNorth American cat market as Brindle sees Florida. After adjustingfor exposure growth, midyear prices were up low-single digits atbest—2-3 percent, Price says.

“We saw instances where it looks like rates increaseddouble-digits on a nominal basis, [but] that same client may havehad increased exposure,” he says. “Price improvement is there, butit is muted…in light of changes in models that [indicate] moreexposure and [in light of] the excessive actual loss experience ofthe last 18 months.”

In fact, Price remarks during Platinum's earning call that themarket's reaction has “taken the fun out of” taking these cat riskson from a reinsurers perspective.

“The nature of the cat market is different today than it was 10years ago,” he says, explaining the absence of any steep pricerun-ups. “Perhaps you have such widespread use of modeling that itputs somewhat of a soft floor on pricing.”

He adds that a rapid rush of competitors vying to take advantageof post-event price hikes also results in a less cyclical catmarket than the ones that existed prior to the last decade.

But North America isn't where the cat action is this year, ananalyst counters, suggesting that reinsurers should now be seeingpost-Katrina-like price hikes in Japan, Australia and NewZealand.

Indeed, on a separate earnings call, Aspen's O'Kane citesaverage boosts of 89 percent in Australia and 49 percent inJapan—far higher than the average rate hikes of 13 percent for theUnited States at midyear.

And at Lancashire, Brindle says his company doubled its Japanpremium this year—where renewal pricing jumped 160-180 percent—andstarted writing in Australia and New Zealand. “We've always beenvastly skeptical of Australasia business,” says Brindle. “We do notworship at the altar of diversification,” he adds, referring to astrategy that put competitors in Australia and New Zealand whencatastrophe events hit those areas.

Following the cat events, he reports 400-500 percent pricechanges for Australasia. “As you would expect us to do, we've takenadvantage of that.”

In contrast, Platinum's Price says there's no clear sign of ahard market in Australia, and reports that Platinum nonrenewed itsentire New Zealand book.

“It's not obvious to me—in light of increasing exposures—that weactually have substantially better net pricing than prior to theevents. So it isn't clear that you have a truly hard market inAustralasia,” he says, citing specific scientific reports ofheightened seismic risk in New Zealand—one indicating that theprobability of a greater than magnitude 6 quake in the next sixmonths is 30 percent in the Canterbury region.

“Rates on line are nowhere near that level in New Zealand,” hesays, referring to premium-to-limit ratios.

“You're getting more money for the contract, yes, but you alsohave a substantially elevated risk level. Is that a hard market forcat? Not by my definition,” Price concludes.

Brindle scoffs at such logic. He reports that Lancashire iswriting in high enough layers that it won't get tagged for lossesunless a there's a major quake in one of New Zealand's biggestcities.

“Without getting into names, it's pretty strange when you seecompanies publicly announcing they're pulling out of Australasiawhen the rating is certainly the highest level any of us canremember. That seems to be a very odd move,” Brindle says.

Noonan tells PC360 that Validus has seen rate hikes in the 50-80percent range in New Zealand and Japan, following massive catlosses in those areas. For the rest of Asia, it was 5 percent.

At those prices, Validus is not willing to fully commit a lotmore capital to the Asian market, says Noonan, the former CEO ofAmerican Re-Insurance (owned by Munich Re). He says that Europeanreinsurers are keeping a lid on pricing, suggesting that the marketis underpricing extreme event risk by 50 percent.

“When you've got capacity that is that big, why do you deploy itin ways that bring market pricing down, instead of pushing marketpricing up?” he asks, wondering out loud about actions heattributes to European reinsurers. “We see this time and again.After the Chilean earthquake…rates were about to go up 100 percent,and they came in with their capacity and rates only went up 50percent.”

“We saw it in Australia this year, at the recent renewals.Ceding company retentions in Australia are just plainly too low,[but] the big Europeans came in and agreed to lower retention dealsat rates below market consensus,” he complains.

“I wonder to myself, do they have enough price discoveryabout the rest of the market to understand the impact that theircapacity has? With that capacity, they could generate far betterreturns by deploying it in a way that was more profit driven,” hesays, stressing that this is not a criticism, but rather anobservation about a different business model.

“I'm not commenting on the companies themselves—just on theirpractices and how it affects the market,” Noonan concludes.